A Series Of Unfortunate Events/Reports

Submitted by Michael Every of Rabobank

If this Daily had a signature scent it would probably be ‘lemony snark-it’. But don’t blame me, blame the series of unfortunate events and reports happening around us.

For example, yesterday I eviscerated the Q1/March data-set that proclaimed “China is back!” knowing full-well that Mr Market wouldn’t care less and would instead say “China is back!”. Well consider this: these amazing data were so, so good that not only did the PBOC inject CNY200bn of MLF liquidity the same day, but Chinese interbank overnight repo rates still shot up to 3%, the highest since late 2014, vs. 1.43% at the start of last week. Yup, growth is so good, so strong, so sustainable that banks are hoarding liquidity again. Does that mean the PBOC will have to pump in more liquidity even as the data say ‘wünderbar’?

Then we had a join-the-dots headline that Chinese authorities are apparently considering a new stimulus package to boost consumption --when retail sales growth was “8.7% y/y” in March-- with incentives to buy more cars and electronics and fridges and whatever else China produces too much of (which is a lot). How is that going to be affordable for households swamped with mortgage and credit-card debt and seeing lower wage increases as pork prices are about to soar? The answer is get rid of the quotas that already fail to keep China from choking on pollution and traffic jams, and subsidies of up to 13% on white goods, and tax cuts; and that means more public debt; and that means either foreigners are going to lend the Chinese money to buy stuff, or the PBOC is. So we are the seeing a replay of the pre-GFC US (hurrah! – how do you say “Cash for Clunkers” in Chinese?) or we are deep into MMT without knowing it (hurrah!). Wake up and smell the lemony-fresh snark.

But don’t ask questions, says Mr Market: Beijing knows best. Even when following that was the even more surreal news that China is now giving subsidised loans --“Red Impetus Loans”-- to private Chinese firms who can prove that they spend time studying and cheer-leading ‘Xi Jinping thought’. The cost savings can be dramatic in many places, dozens of percentage points on a loan, for example, and all you have to do is use the “Xue-Xi-Qiang-Guo” Little Red Xi-Jinping-Thought app, and actively promote the Communist Party inside your firm and in broader society. I won’t comment any further to ensure I don’t jeopardise any future cheap borrowing I might want to do.

Smelling of roses to some, but still all lemony snark-it to me, this morning it’s the latest iteration of the ‘Trade War is Over Soon!’ meme. Bloomberg again reports senior US and Chinese officials are scheduling more meetings to ensure that a ‘trade deal’ will be signed at the beginning of May or maybe June. Once again, however, all the details of this ‘trade deal’ stem from Treasury Secretary Steven Mnu-China rather than US Trade Representative Lighthizer. Unsurprisingly then they are both positive and gibberish. The only key takeaway I agree on is that this ‘deal’ is going to be sold as a win for US farmers – but given China doesn’t need any US soybeans right now given its total absence of pigs, I am not sure how even that can play out. (By the way, China claims pork production is down around 5% as a huge swathe of its herd is killed off. If you believe that, Chinese pigs will fly as well as being buried alive in giant pits.) Regardless, if I were Australia I would be very nervous – will their farmers suffer to placate those in the US? Another unfortunate event that might link to trade talks is that North Korea is reporting it has tested a mysterious ‘Tactical Weapon’. How will US President Trump respond to that, if at all?
Of course, the Chinese could use a trade deal to take the pressure off, regardless of what the recent data said. Moreover, so could the US. The Beige Book overnight reported the US economy is seeing only “slight-to-modest” growth in most districts, although there was also talk of labour shortages in some areas, which is being met by stubborn resistance to raise wages in most places (because “markets”). Simultaneously, the Fed’s Harker said he sees “at most” one 25bp hike in 2019 and another in 2020, while Bullard didn’t talk rates at the Hyman Minsky conference, when asked about MMT he said “There is some groupthink at the Fed and so it helps to get some injection of new thinking.” Mmm…

Over in the UK, as everyone starts thinking about chocolate eggs, there has still been no Brexit breakthrough. Rather, talks between Labour and the Tories over a Brexit compromise are apparently close to stalling, as should come as no surprise to anyone who knows UK politics; Tory plotters are working to undermine PM May’s authority even further; and there are warnings from Germany that there will be no further extensions to Brexit after October. Mr Market is having none of this, however, and GBP remains around 1.30.

Down in ‘Straya (‘Straay-aay-yaaa) the jobs data today were more key than usual after the RBA’s surprising decision to actually talk about a potential scenario where they might cut rates rather than hike them. The Aussie report showed jobs up 25.7K vs 15K expected with full-time jobs up 48.3K and part time -22.6K. That’s really rather unfortunate because, as I keep repeating, these numbers are simply not credible in an economy of Australia’s size, and neither do they capture immigration that in some months is worth up to 10-15 (and even 20K) jobs a month. Neither do they show the real underemployment that is out there in the economy. However, this report will be strong enough to keep the RBA smug and sitting on their hands for long enough that it will take a more aggressive rates move too late in the game for them to be able to make a difference.